Q1 2014 Update

Operating Results:

We report Sandalstone’s 1st Quarter 2014 to be another record . Quarterly revenues increased 15% over 2013 and 2% sequentially over the prior quarter. The growth is decreasing as we have not purchased any new properties in over a year. Next quarter's results will reflect that as growth may well be negative. This quarter we were helped by having Zero Vacancy. The 2% increase in the quarterly number reflects 100% occupancy as well as a few price increases that we were able to enact. Overall, the rental business is performing well.

In what could be called a tale of two markets the Bay Area economy is firing on all cylinders.  This is reflected in a very strong rental market.  We had one rental turnover.  We had zero vacancy and raised rent 12.5%.  This is a property where we have been experimenting with a shorter term model.  We offer it furnished and with a shorter term lease.  While more management intensive, the returns are higher and the short term option usually ends up being long term - meaning the option goes unexercised - as tenants place a higher value on being able to move than they actually need.  Might be an interesting arbitrage opportunity here?  We are going to add another property to this strategy next quarter using an even more shorter time-frame.       

In Las Vegas we still don't have a fully recovered economy.  There we have been cautious about raising rents - mostly holding steady.  Overall vacancy is about 6 to 8%, ours has been below that.  So the strategy is to keep our good tenants in place until there is more of a bullish call on the economy.  Again, we forecast that this will happen in the latter half of the year as the new larger projects start employing people along with the continued rebound in the national (and global) economy.    

Market Update 

We reference Case Shiller in each of our updates as we believe that index to be the best indicator of asset prices.   Las Vegas and SF were once again the Top Two markets in the nation registering annual gains of 23.1% and 22.7% respectively.   If we look at Zillow's Zestimates for our properties the gains have been at least over 40% from all-in costs with the Oakland properties approaching 100% gain.  The latest numbers (Case Shiller is of Feb) on pending sales and new home sales seem to indicate weakness.  Which is to be expected.  We have had a bounce from the absurdly low prices which investors pushed back.  Now the real economy needs to do its part.  That is still missing in many parts of the country.  We expect to see a tapering of these price appreciation numbers.   

We continue to focus on the yield which for our investors continues to be highly attractive.  The properties have continued to generate substantial tax advantaged income and our preference will be to maximize the overall dollar gain over a rate of return metric. Sometimes its hard to sit tight and be disciplined however we believe there is upside on asset prices AND we are getting paid to wait.    

Financing Update 

We also have an update on Sandalstone's Note program.  We had our first investor ask for their money back.  We accomodated that request immediately.  Within hours we had several other investors who sought to invest.  It was a good test of that program - and one that we are glad provides a win-win opportunity.  From Sandalstone's standpoint it lowers our cost of capital while from our investors standpoint it offers the opportunity to collect yield on a fully liquid "deposit".  Please contact me if you have interest in this program.  

MOVING FORWARD

We have had a change in Fed Chairperson since the last writing with Janet Yellen taking over from Ben Bernanke.  It appears the Chairman Yellen is continuing the easy monetary policy of her predecessor - signalling a continued low rate environment.  This makes real estate assets expensive as people continue to buy low cap rate investments as there are very few alternatives.  This makes for a rather un-interesting time for us to buy.  We are starting to look aggresively for opportunities as we have seen a pick-up in inventory.  The operative word though continues to be disciplined and not buy for the sake of growth.  

Clarameda Fund, LLC:

  • No news to report from last quarter - which is good after last quarter's adverse items.    
  • Continued Partner distributions (every month for past 5 years and going...)
  • Issued Partner K1s in March.
  • Will revisist decision on Special Distribution in June.   

In Summary,

Our results continue to be good as a result of our past timing and a strengthening economy.  Growth will cease in the next time period - so the question will be if we can re-kindle that in a way that will be accretive.  Tougher!  Thanks for everyone's interest and support.    

 

Cheers!

 

Biren
Biren Talati
Managing Member
Sandalstone Group, LLC

 

MARKET DATA

VANGUARD REIT ETF:

 
 
CURRENT YIELD:  2.8%  

HEADLINES

Bay Area Rents:

All-Time high reached for Rents

Case Shiller:

WSJ:  Feb 2014 Case Shiller - Top Two Markets: Vegas and SF   

Las Vegas Unemployment:

Nevada holds steady at 8.5% still above national